Impact of Organised Retail On Unorganised Retail
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Published: Thu, 22 Feb 2018
The revolution in Indian retail industry has brought many sweeping changes and also opened door for many Indian as well as foreign players. In Indian scenario there is always a constant clash between challenges and opportunities but chances favors those companies that are trying to establish themselves. As every coin has two faces similarly it also has some pros and cons. In India about 96% of retail markets consist of unorganized retail players such as kirana stores.
As a result of favorable demographic conditions such as changing life style of Indian consumers and government policies provide huge opportunities for Indian corporate houses as well as foreign players. If we compare today’s scenario with earlier we found that at that time the price and the delivery mode is totally different .at present the markets and their processes are more flexible in all aspects. The new Snow-white market places have started to replace the traditional bazaar – kind of dwarfed tiny corner kirana shop.
India has highest shop density in the world. It has more than 1.5crores retail shop thus providing 2nd highest employment after agriculture. It employs 7% of total workforce and contributing more than 10% of India’s GDP.But have we ever thought that what by the entry of big retailers what will be happened to those unorganized retail kirana stores which constitute 96% of it? It may not have an immediate effect but in long run it might affect the small kirana stores and thus many people would loose there job , many families could get affected thus in long run we should not ignore this issue . The main purpose of this report to study the impact of organized retail on the small kirana stores and to find:
- How kirana stores can sustain themselves in long run?
- How they will cope in the competition from organized retail players?
- Are the steps taken by government enough for their safeguards?
This paper discusses the various challenges faced by both organized as well as kirana stores in Delhi NCR and how both can sustain in equilibrium without much affecting each others.
Retailing can be defined as the sale of goods or merchandise, from a fixed location such as a department store or kiosk, in small or individual lots for direct consumption by the consumer. Retailing is a well recognized business function which compromises making available desired product in the desired quantity at the desired time. This creates a time, place and form utility for the consumer. The success of retailing is depend up on the efficient supply chain and assortment of merchandise mix.
A well-developed supply chain reduces wastages and transaction cost thereby reducing the cost of inventories to be maintained by the producers and the traders. A reduction in the cost of inventory management leads to a reduction in the final price to the consumer. Retailing has been identified as a key source for promotion of textiles, processed foods, agricultural and horticultural products.
Recently due to certain demographic and economic changes India retail sector has taken a new breathe. It has created a lot of opportunities for big corporate houses like Tatas , Reliance and Bharti etc as well as for many foreign players. As in present scenario Indian retail is in nascent stage therefore it is not much affecting the small kirana stores but in long run its affect can be ignore.
Undoubtedly, revolution in retail is good for Indian consumers as well as government as it will increase the taxes i.e. income for government and consumer will have more choice.
Broadly Indian retail sector can be classified into two segments:
Unorganized retailing is characterized by a distorted real-estate market, poor infrastructure and inefficient upstream processes, lack of modern technology, inadequate funding and absence of skilled manpower. Therefore, there is a need to promote organized retailing.
Organized Retailing can be defined as a form of retailing whereby customers can buy goods in a similar purchase environment across more than one physical location for verticals from food, grocery, apparel, consumer durables, jewellery, footwear, beauty care, home décor, and books to music.
In organized retailing a proper record is maintain by the government and retailers need to pay the tax to the government.
What is the threat for local organized stores?
India has highly fragmented retail industry. Today’s scenario India, still have of the traditional formats & retailing .Today still local kirana shop, pan, bidi shop, hardware
Store, weekly hatts,convenience stores & bazaars etc.It constitute about 96% of retail market .About 12 million outlets operating in country and only 5% of them being larger than 500 square feet in size.
In India it is very important to understand what role it pays in lives of Indian citizens from social as well as economic prospective. Retailing is probably the primary form of
Disguised Unemployment In Our Country
As we have over crowded agriculture sector and stagnating manufacturing sector and the low wages and hard work in both sectors forced many Indians to jump in service sector.
Here due to lack of opportunities it is almost become a natural decision for an individual to set up a small shop or store depending upon his financial condition .Thus retailer is born by circumstance not by choice.
Ultimately it provides job of more than 6 crores people where as organized retail provides employment to roughly 7 lakhs peoples. So the policy makes should be careful about these 6 crores peoples, whose livelihood may get in danger in future.
Retail Industry Structure
Worldwide retail industry is one of the most attracting industry being controlled by a handful of powerful corporations based mainly in the U.S and Europe, namely, Wal-Mart, Tesco, Carrefour and Metro. Beside these their are many others big MNC retailers but they have saturated in their home countries only and are looking for penetrating emerging markets like India, China and Russia. As these players are penetrating in these countries thus providing a world class shopping experience to the consumers.
Today consumers become more demanding want world class products as well as not only buying but an experiential shopping. Thus shift in consumer behavior in these emerging markets attracting world biggest players. Also the saturation in US retail market and other existing markets in developed countries forcing them to move in new market like India and china.
Retailing in United States
Retail Sector is the second largest industry in U.S. both in number of establishments and number of employees. The U. S. retail industry generates $3.8 trillion in retail sales annually ($4.2 trillion if food service sales are included), that is approximately $11,993 per capita.
Wal-Mart is the world’s largest retailer and the world’s largest company with more than $312 billion (USD) in sales annually. Wal-Mart employs 1.3 million associates in the United States and more than 400,000 internationally. The second largest retailer in the world is France’s Carrefour.
Retail Trends in other Countries
- China had initially restricted FDI in retailing to only joint ventures at 49 percent foreign holding and only at specified locations subject to a ceiling on the number of stores.
- Malaysia, Indonesia, Thailand and Japan have enforced zoning restrictions for mega-retailers.
- There are minimal capital requirements for foreign retailers in Sri Lanka.
- The Philippines has imposed “sourcing” and reciprocity requirements on foreign retailers.
- In Japan, mega-retailers must seek the views and permission of small local stores before opening a new store.
- In the US, major cities such as Los Angeles, California, Chicago and New York City have restricted the opening of Wal-Mart stores within city limits.
- France enacted the Raffairin Act that regulates the growth of hypermarkets larger than 300 square feet.
- In Thailand, the government has set up an assistance fund for local retailers due to the impact of mega retailers.
Share of Retail Market in world economy:
Total Market ( bn US $)
Indian Retail Scenario
Traditionally Indian Retail can be traced back from Weekly Markets, Melas, Village Fairs in Small towns and villages to Kirana stores, PDS outlets, Khadi Bhandaar, co-operative stores
in Urban cities. The wave of retail began with various textile manufactures like Bombay Dyeing, Raymonds, S Kumar’s, and Grasim foraying into selling the product through their outlets
and competition among FMCG players driving the forces towards retailing. The evolution of retailing lead to an emergence of various modern formats like Shopping malls, Super-marts, Hyper-marts,Departmental Stores, Apparel Stores, etc. catering to majorly all sectors of society providing the all-important 3Vs – Value, Variety and Volume.
Retail Boom In India
Indian Retail Sector is at its inflexion point awaiting multifold growth. The Retail Industry’s Size is presently Rs 1, 44,253 crores out of which the organized sector contributes to a mere 4 percent
Of the market size, fairly dominated by scattered, unregulated, & unorganized players. Retail sector is expected to grow in tandem to the GDP growth-rate. This sector is slated to be the biggest contributor to GDP of around 10 percent and has promisingly generated ~8 percent employment in India, which is moving towards a larger generation of employment opportunities in the times ahead.
Future Of Organised Retailing In India
Due to the urban-rural divide, organised retail will grow in the metros and large cities, followed by semi-urban and rural areas. Thus India is on the verge of an enormous multi-fold growth of organised retail. In a span of just 5 years, organised retail is expected to expand in urban cities besides making an entry in semi-urban and rural areas. Presently, the organised retail market is 4 percent of the total retail, that is around Rs 67,310 crore and is expected to compound at 27 percent per annum, aggregating to Rs 1,75,103 crore (7.44 percent of the total retail) in 2010-11. The retail industry is assumed to grow at GDP growth rate. The retail revolution signals softening of inflation rate on an yearly basis, due to elimination of intermediaries in retailing and passing on of all the benefits to the consumer. The mantra expediting the retail growth is ‘Consumer is the King’.
Penetration of Organized Sector
Organized Share of retail sector is expected to increase to 8-9 percent in 2010-11 from 4 percent in 2007.
Segmental Growth of Retailing
Food and Grocery
This is the largest vertical of 74.4 percent of retail size compromising fruits and vegetables, milk and milk products, staples, cereals, grains, pulses, processed food, ready to cook and ready to eat meals, spices and other eatables. This is least penetrated segment across all verticals of around 1.5 percent, being the most untapped pie. According to NSSO 60th round, 54 percent of the rural and 42 percent of urban expenditure was on food.
Clothing and textile is a large organized vertical dominated by textile manufacturers Raymond, Bombay Dyeing, Vimal, and by big retailers like Pantaloon, Pyramyd, Koutons having ~16.4 penetration level. Increasing disposable incomes and change in the lifestyle needs has pushed the segment.
The electronics and consumer durable is the biggest organized segment penetrated to ~20 percent. There lies more unearthed growth in the verticals as the craze for electronic gadgets have been picking up with the advent of nuclear families.
Home Décor and furnishing
The demand for furnishing is going to be spearheaded by a huge demand for the real-estate, paving way to tap the unorganized segment. Presently only a few players like Gautier, Godrej, &Durian function as organized entities.
Jewellery and Watches
Titan is the early entrant in the segment followed by MNCs Oyzterbay, Tanishq, Swaroski, Orra, Gitanjali, & D’damas driven by demand for fashion accessories, and huge advertising and promotion campaigns.
The organised players in Beauty Care are HLL (Lakme Salons), Marico (Kaya), Health and Glow are having a huge growth impetus.
Leaving aside the Apparel, Footwear segment is forming a big pie in the organised retail sector, expected to grow to greater heights with foreign payers like Crocs Inc.
Books, Music and gifts
In addition to Tier-II and Tier-III cities, the habit of reading books and listening to music is picking up among the Tier-I cities. The stores like Oxford Bookstore etc are experiencing this upswing.
Organized Retail Growth in Indian Cities
The Retail sector contributes to around 36 percent of GDP in India and is largest employment generator. The sector is dominated by small-scattered unorganised regional players, large
players contributing to meager 10 percent of the total pie. Organised retail is at its nascent phase wherein the large organised retail groups are having aggressive expansion plans to penetrate the Metros and Tier I cities and establish themselves amongst rural masses of Tier I and Tier II cities. There lies a challenge for retailers to experiment with new value formats along with developing customer loyalties. Since there will be demographic shift in population growth, urbanization and migration due to transition in urban household growth and income distribution. The total retail market in the top 67 cities in India in 2006 was Rs. 2.55 trillion, which is expected to increase to Rs. 3.91 trillion in 2011. According to CRISIL, around 87 percent of the retail opportunity comes from top 25 cities compromising Metro Delhi, Mumbai, Calcutta, Mini Metros Hyderabad,
Chennai, Bangalore, Mini Metros Ahmedabad and Pune, Tier I cities of Kanpur , Nagpur, Surat and Ludhiana, Tier II cities Coimbatore, Chandigarh, Lucknow, Kochi, Jaipur and Tier III cities Vadodara, Vizag, Indore, Vijaywada, Thiruvananthpuram, Bhopal, Nashik and Madurai.
The levels of penetration in the top 67 cities are expected to leap.
Organized retail has been established in Metros and Tier 1 cities, other cities having negligible level of penetration
Retail Formats in India:
These are food and non-food neighborhood counter stores, also called ‘mom and pop stores’ in western countries. These are big chunks forming the segregated and unorganised retail segment. These are family-ownedand- run retail-outlets picking the goods from wholesalers totaling to around 12 million stores across India.
These are the largest chunk of unorganised retail catering to urban and rural masses. Mandis are physically located at different regions to enhance convenient shopping. The sellers bring across various products like eatables,vegetables and fruits, pulses, cereals, spices etc. The most prominent of them are sabzi mandis found in most of the localities across India.
This form is operating in rural areas where buyers and sellers gather once in a week or month from nearby villages and small towns to cater their livelihood and leisure needs. These haats are a source of entertainment and socialization among rural masses.
Push Cart Vendors
The are categories of vendors roaming from door to door in various localities selling fruits, vegetables, and other eatables, from which mostly housewives makes purchases that too on credit.
Modern organized retail formats:
Area -60000-700000 square feet
Point of differentiation: Multi format, Multi products, Multi brand caterings, Lifestyle needs.
Area: 50000 – 100000 square feet
Point of differentiation: Multi vertical
Area: 5000-10000 square feet.
Point of differentiation: low cost, low margin high volume, self service operations design to serve total need for food, laundry & household maintenance products.
Area: 20000-30000 square feet.
Point of differentiation: single vertical , several product lines
Area: 20000-25000 square feet
Point of differentiation: Multi branded, Single vertical, focusing on high & consumers
Area:-2000-5000 square feet
Point of differentiation: Narrow product line with deep assortment ,multi branded, Single vertical on specific needs of the customers.
Area: 500-5000 square feet
Point of differentiation: Owned/Franchised, Single products
8. Convenience stores
Area: 200-500 square feet
Point of differentiation: Located near residential area, open long hours, seven days in a week, limited product line, high turnover
Advantages of conventional & Modern Organized retail formats
- Low operating cost & Overheads.
- Proximity to consumers.
- Low operating hours.
- Strong relations with customers.
Modern organized retail formats:
- Large bargaining power with suppliers.
- Range & variety of goods.
- Quality assurance( Brand related, durability)
- Convenience & Hygiene
Business Models suiting Indian Scenario
Cash-&-carry Wholesale Model
Cash-&-carry is a form of retail trade in which goods are sold from a wholesale warehouse operated either on a self-service basis where customers settle the invoice on-the-spot or pay cash
and carry the goods away themselves. The cash-&-carry player also performs many value-added functions, including selling and promoting, buying and assortment building, bulk-breaking, warehousing, transporting, financing, risk-bearing, supplying market information, and providing management services.
Retail Chains are entering residential areas with the hub-andspoke model, whereby one large store supports various smaller stores in the nearby residential areas. This is win-win model is well-suited to the Indian business scene where large stores obtain supplies from the warehouse and supplies to the consumers, involving both large payers acting as wholesalers and local kiranas as retail outlets. With efficient supply chain management, availability of space and proper technology in place, this will not take much time. The Piramyd Retail’s Trumart Stores (food and grocery) in Mumbai and Pune are based on a similar model.
Growth Enabling Factors
Higher Disposable Income
The disposable income has been showing a rapid increase from the last few years and is expected to grow steadily because the proportion of the major consuming class (population having incomes higher than Rs 90,000) is expected to reach 48 percent by 2009-10 from 20 percent in 1995-95, at the 2001-02 prices, at a CAGR of 9.3 percent over the next 8 years leading to new consumption patterns due to increasing depth in the consumers’ pocket.
Growing Working women population
The propensity to spend in the case of working women is higher by 1.3 times as compared by housewives. According to the census report, the population of working women increased to 26 percent in 2001 as compared to 22 percent in 1991.
Adoption of Nuclear Family culture
The increase in per capita income paved way to increase the nuclear-family culture. The proportion of nuclear families as a percentage of total household population has increased as shown by fall in average household size from 5.57 in 1991to 5.36 in 2007, expected to fall further to 5.02 by 2011. This will fuel the growth of organised retail.
Baby Boomer Effect
The demographics of Indian population has a steep growth in earning population (15-60 yrs). In 2000, 593 million people (58.3 percent of total population) constituted the age bracket of 15-60 yrs – growing from an unprecedented level of 335 million people (54 percent of total population) in 1975 at a rate of 77 percent (CAGR of 2.3 percent) in contrast to a population growth of 64 percent (CAGR of 2 percent) over the same period of 25 years. Over the next 15 years, the earning population is expected to increase to 62.8 percent in 2015, translating into a population of 782 million.
Growth in Urban Population
Urbanization has increased at a rate of 2.7 percent over the last 10 years (1990-2000). In 2000, the urban population was estimated to be 281 million (27.7 percent of the total population). This trend is likely to continue and urbanization is expected to grow at 2.4 percent between 2000 and 2015. In 2015 the urban population is expected to be 401 million, constituting 32.2 percent of the total population.
Robust Outlook towards Branded products
Due to liberalization of manufacturing sector, various organized branded products have entered into Indian markets, thereby developing and widening the basket for branded finished goods. With the advent of International competition, new trends and lifestyles are evolving among India masses resulting into 10-15 percent growth in branded products. This has established the base for organized retail market in India.
Growth in Retail Malls and various other new Formats
Real Estate players like Raheja’s, Future Group, DLF, Omaxe, Piramal Group, Parsvnath, Unitech are developing retail malls and leasing out the retail spaces to various retailers of varied
products making it a one-stop shopping destinations in urban and semi-urban cities. These shopping-cum-entertainment malls are wooing young buyers to increase their conversion rate backed by increasing foot-falls. Around 358 malls have come up by 2007, covering a total space of 87 million square feet, thereby pushing organised retail to new heights.
Plastic Money becoming a greater Pie of credit
The use of plastic money in the form of debit and credit cards has expanded multifold in last 5 years. The number of credit cards has grown at a CAGR of 28 percent and debit cards galloped by 140 percent. The customers have adopted the habit of electronic payments and leveraging their pockets shifting from basic needs to lifestyle products.
Swot Analysis of Organized Stores
- As being technology intensive .these stores are able to forecast customer demand, shorten lead time reduce inventory holding & ultimately save cost.
- Wide assortment show customer has variety of choice
- Despite of high footfall the conversion rate is very low. As a result retail measure experiencing an ROI of only 8% to 10%
- Organized stores have less customer loyalty as compare to unorganized stores.
- Low customer knowledge
- Lack of personal touch
- Indian middle class is already 30 crores & projected to grow to over 60 crores by 2010 making India one of the largest consumer markets in the world.
- According to KSA projections by 2015 India will have 55 crores people under the age of 20 reflecting the enormous opportunities possible in the kids & teens retailing segments.
- High real estate rent.
- Poor Infrastructure
- Less develop shopping culture.
- Due to fragmented market high distribution cost.
Swot Analysis of Unorganized Stores
- Located in prime residential area.
- Rental for large stores in these area are generally not available.
- They enjoy a near monopoly in area that is backward or do not have a population with sustainable purchasing power like rural areas. since organized retailer are unlikely to enter such reasons
- Do not provide quality assurance.
- Less concern about ambience & hygiene issue.
- Low capital requirements
- Proximity to consumers and strong relationship help them to gauge .Customer needs & stock accordingly & thus gaining more business.
- Increase in use of credit cards
- With huge stores coming up in catchments areas of 5-7 km of approachable distance & larges chains planning to set up hub & spoke, smaller stores. So the very existence of traditional store is in danger.
- Low or no bargaining power due to small scale of operations
- Due to smaller in size unable to stock a variety of goods.
- Provide not many options to the customers.
Why Indian consumers want more experiential shopping today?
The Indian consumer is changing rapidly. The average consumer today is richer, younger and more aspirational in his or her needs than ever before. Consumers now value convenience and choice on a par with getting value for their hard-earned money. A range of modern retailers is attempting to serve the needs of the ‘new’ Indian consumer.
Today Indian consumers want not only buying but a full shopping experience. For this one of the important factors responsible is change in life style as well as disposable income.
As per Indian consumer’s map , approximately 209 million of total household in India 6 millions are rich having annual income of more than US$ 4700 .this number were 1 million household in 1994 and 3 million households in 1999-00 thus this class is growing very rapidly. About 50% of these families are living in metros and spending more than eighteen billion annually. As per the need of these families around 62% market for premium products is concentrated in Mumbai, Bangalore, Chennai and Kolkata.
But now retail market is moving toward big and also small cities . India’s 8.5% of the retail market concentrated in 8 big cities .As per an estimate among rich class top most 1 million customers comes under superrich category growing by 20% per annum and shows behavior similar to international consumers . While this segment is worth targeting for high-end premium products, it is not the key driver of the organized retail sector.
The real driver of the Indian retail sector is the bottom 80% of the first layer and the upper half of the second layer of the income map (see ‘Map of India’s income classes’ below). This segment of about 40 million households earns USD 4,000-10,000 per household and comprises salaried employees and self-employed professionals. This segment is expected to grow to 65 million households by 2010 and is currently the key driver behind explosive growth in passenger car sales (USD 5 billion in 2004) and mobile phone penetration (over 70 million).
The top 6 Indian cities -Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad -are the darlings of India’s exploding economy. They represent 6% of the population, but contribute 14% of India’s GDP. They are the centers of business, finance, politics and the emerging sunrise industries such as IT, pharma and ITeS, which have put India on the global map. These cities are also the barometer of India’s economic development and most foreign investors have flocked here.
Are Indian consumers are ready for organize retail?
By the end of 20th century in Indian retail sector too many significant changes has taken place. The retailing industry, which in early1990s was dominated by the unorganized sector, is now going a drastic change with a rapid growth in the organized sector with the entry of many corporate groups such as Tata, RPG, ITC and Bennett Coleman & Company.
Now Indian consumers are much aware about domestic and foreign products by the different source of media, such as newspaper ,television and the internet Apart from this there are too many social changes like increase in working couples , increase in number of nuclear families , rapid Urbanization.goverment policies ,increase in availability of retail space , increase in disposable income , availability of educated manpower also catalyzed the growth of organize retail .
Food retailing was the most important area where players like food worlds establishing their outlets all over the India. Beside it supermarket and departmental stores now replacing traditional grocery stores all over the India , by the entry of fast foods (McDonalds), packaged foods (MTR), vending machines and specialty beverage parlors (Nescafe, Tata Tea, Cafe Coffee and Barista) brought about significant changes in the eating habits of Indian consumers.
Indian retail sector still has long way to go till now many research work and articles have been return over Indian retail. These articles and research work mainly focus upon huge untapped markets in Indian retail. They mainly talk about the opportunities available in the Indian market for the growth of organized retail. Some of the important research paper and articles which inspired me and catalyzed my thinking process over this topic are:
“The evolving retail market in India” was written by Dale Anne Raiss and Ranjan biswas working as partner and head of market at Ernst & Young .In this report they talk about largely untapped potential in retailing in India. They also tal
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